Decomposing the Environmental Effects of Trade Liberalization: The Case of Consumption-Generated Pollution

This paper investigates the effect of international trade on consumption-generated ("tailpipe") pollution. For countries exporting the dirty good, trade liberalization increases its price, thus increasing domestic production and decreasing domestic consumption of dirty goods at the same time. This forces pollution from production and consumption to move in opposite directions, leading us to expect that trade-induced composition effects work differently for tailpipe and smokestack pollution. Our theoretical model predicts that capital abundance reinforces the pollution policy effect for tailpipe pollution, counter to the case with smokestack pollution. Empirical support for this comes from our analysis of an international panel of data on carbon monoxide emissions. We find evidence in support of an effect analogous to the pollution haven hypothesis, which has typically not been observed in previous literature. Thus trade liberalization may affect smokestack and tailpipe pollution differently.